Thursday, January 3, 2013

Moody's: Fiscal Cliff Deal a Mixed Bag

Moody's Investors Service said that the fiscal package passed by
both houses of Congress yesterday is a further step in clarifying the
medium-term deficit and debt trajectory of the federal government.
It does not, however, provide a basis for a meaningful improvement
in the government's debt ratios over the medium term. The
rating agency expects that further fiscal measures are likely to be taken
in coming months that would result in lower future budget deficits,
which are necessary if the negative outlook on the government's
bond rating is to be returned to stable. On the other hand,
lack of further deficit reduction measures could affect the rating negatively.
Notably, yesterday's package does not address the federal
government's statutory debt limit, which was reached on December
31. The need to raise the debt limit may affect the outcome of
future budget negotiations.
Although the fiscal package raises some revenue through higher tax rates
on individuals earning more than $400,000 ($450,000
for joint filers) and through some other smaller measures, the estimated
amount of increased revenue over the next decade is far outweighed by
the amount of revenue foregone through the extension of lower tax rates
for those with incomes below $400,000, the indexation
of the alternative minimum tax, and other measures.

But there's another portion of the statement suggesting that this deal was a net economic positive:

The macroeconomic effects of the package are positive, since it
averts the recession that would likely have occurred had personal income
taxes gone up for all income levels. However, the increase
in the Social Security payroll tax from 4.2% to 6.2%
of income that became effective on January 1 will likely be a constraint
on growth in coming quarters. Furthermore, expenditure cuts
that may be decided in coming months could also affect the rate of GDP
growth in the near term. Overall, therefore, the recent
package mitigates part of the fiscal drag on the economy associated with
the fiscal cliff but does not eliminate it.

That paragraph is one McConnell and Boehner might take some solace in, along with President Obama and his allies.

Perhaps the principal thing driving the debt over the short and medium term is the sluggish economy. Keeping the economy from slipping into a deep recession is also a powerful deficit reduction tool. Both Republicans and Democrats could keep that in mind.